Basic Concepts of Economics

Session Objective:

Use basic economic concepts to explain changes in natural resource base and environmental quality

Agenda
What is economics? Basics of microeconomics Three basic theories

Rational behavior Opportunity costs Marginal analysis

Making choices Supply & demand model

What is Economics?
A social science that studies and influences human behavior Microeconomics studies how individuals use limited resources to meet various needs and consequences of their decisions Macroeconomics studies the determinants of aggregate level of economic activities

Basics of Microeconomics
A fundamental contradiction in life: Resources are limited or scarce Human wants are unlimited or insatiable Therefore, choices must be made! Economics is about making choices!

Theory 1: Rational Behavior

People know what they want; Their behaviors are consistent with what they want; Assume information is given.

Opportunity Cost
The cost of anything in terms of other things given up or sacrificed. What would you be doing right now if you did not come to this workshop? No pain, no gain There is no such a thing as free lunch!

Marginal Analysis

Effects of per unit change in activity

effects of converting another 100 ha of forests effects of consuming another 100 kg of water effects of catching another 100 tons of fish effects of reducing another 100 tons of pollutants

The effects have two sides: benefits & costs

Diminishing Marginal Benefits

As you increase your activity while other things remain constant, the benefits from each additional unit of your activity declines.
The benefits of eating the 2nd, 3rd, and 4th pizza?

Increasing Marginal Costs

As you increase your activity while other things remain constant, the costs of carrying out each additional unit of your activity increases.
Costs of attending to the 2nd, 3rd, and 4th week of the workshop?

Making Choices

To do or not to do:
TB > TVC (or P>AVC) in the short run TB > TC (or P > AC) in the long run

To do how much: until MB=MC

MB = P in perfect competition

How to do: choose the least cost combination of capital, land, labor, and technology

Law of Supply
The quantity supplied will increase if the price does up, holding other things constant. This relationship reflects increasing marginal cost of supply (MC) Determinants of supply: factors other than price that influence supply: number of producers, cost of production, and technology

Law of Demand
Demand will increase if the price goes down, holding other things constant. This relationship reflects diminishing marginal benefit from consumption (MB) Determinants of demand: factors other than price that influence demand: income, number of consumers, and preferences

Supply and Demand Model

in a perfectly competitive market
Price Supply = MC

Demand = MB

Quantity

Individual Producer
in a perfectly competitive market
Price Supply = MC

Demand = MB

Quantity